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Only NASA could award a $500m contract and bill the handout as "doing things on the cheap."

The US space agency today announced that two companies - SpaceX and Rocketplane Kistler - will split a first-of-its-kind $500m grant. The companies have been tasked with creating systems capable of delivering cargo and personnel to the International Space Station. NASA hopes that creating a market for this type of service will not only help it restock the space station at a reasonable cost but also inspire the private sector's efforts to push space commercialization.

"If the commercial sector can do this safely, reliably and more cost effectively, then it is in our best interests to buy that service," said NASA's Exploration Systems Mission Directorate Associate Administrator Scott Horowitz, during a press conference.

NASA first announced the open Commercial Orbital Transportation Services (COTS) program seven months ago. Twenty companies turned in craft proposals, and NASA then settled on six finalists - the two winners plus SpaceDev, Spacehab, t/Space and Andrews Space.

The COTS program stands as Administrator Mike Griffin's biggest gamble since being tapped to run NASA in March of last year.

Rather than bankrolling entire projects as its has in the past, NASA has embraced a quasi venture capitalist role with COTS. If all goes according to plan, SpaceX would earn $278m from NASA, while Rocketplane Kistler would pull in close to $207m. Both companies must meet quarterly performance objectives over the next few years to acquire their payments.

Those payments, however, are meant to be just part of the investment made by both companies toward their spacecraft projects. NASA's funding gives SpaceX and Rocketplane Kistler a helping hand and also guarantees a large customer, if the companies can meet their objectives.

"This will be the commercial sector demonstrating that they can do the job," Horowitz said.

SpaceX and Rocketplane Kistler must conduct a series of test flights to prove the safety of their crafts. Both companies have settled on rocket-based designs where a cargo module breaks off, goes into orbit and then docks with the space station. Their ships will run on a mix of kerosene and oxygen.

The new vehicles should start making their way to the space station in the next couple of years. NASA expects that about "half a dozen flights per year will be required on average" with the crafts needing to deliver about 10 metric tons of cargo to the space station.

In addition, the COTS craft could assist with the the void created between 2010 and 2012 when NASA retires the space shuttle in favor of the Crew Exploration Vehicle (CEV).

The other competitors will have a chance to earn NASA's business during the second phase of the COTS program that kicks off around 2010. NASA will issue a another set of contracts for companies that can deliver crafts to fly to the space station on a "pay-as-you-go" basis.

"We don't consider any of these companies losers," Horowitz said. "We are encouraging the others to continue, and they will have opportunities to bid on Phase II."

NASA's picks could be seen as controversial given that SpaceX has suffered from an embarrassing past rocket failure, while Kistler is just coming out of bankruptcy.

"In some cases, you may say failure is a good thing to have on your record because that learning is behind you," Horowitz said, putting the best possible spin on the situation.

NASA chief Griffin has noted the obvious risks involved with COTS from both a technological and investment standpoint.

Griffin will be hailed as a hero if this mix of government and private sector efforts works. NASA will lower its costs, while the public should benefit from a vibrant market for commercial space endeavors.

If the COTS project flops, then Griffin will be crucified for wasting $500m in tax payer money. ®